One of the City’s leading economists has countered George Soros’s prediction that a Brexit vote will lead to a damaging 20% fall in the value of the pound by saying that a depreciation would be good for the economy.
Albert Edwards, global strategist at Société Générale, said in a research note to the bank’s clients that a reduction in the value of the currency would be as beneficial as it was during the period after Black Wednesday in September 1992, when Soros’s speculative attack on sterling drove the UK out of the exchange rate mechanism (ERM).
Warning that the pound could fall whatever the outcome of the referendum on Thursday, Edwards said: “There is an argument that a Brexit might look similar to the aftermath of sterling’s ignominious exit from the ERM.
“After this much-feared event, the UK economy actually recovered strongly and unemployment fell sharply. In a current environment where central banks and governments have failed to generate a strong enough economic recovery to normalise interest rates amid persistent deflationary pressures, one would have thought a substantial decline in ones currency would be welcomed for that is one way to inject a modicum of inflation back into the economic system.”
Britain ran a current account deficit of 5.5% of GDP last year – a peacetime record – and the budget deficit stood at 4% of GDP despite attempts by George Osborne to balance the books over the past six years. “The UK economy is a mess and that has nothing to do with Brexit; it has everything to do with economic mismanagement,” Edwards said. He added: “I think sterling will end up falling substantially whether the UK stays or leaves the EU. It is just a matter of timing.”
Soros said in a Guardian article there would be a 20% slide in sterling in the event of the UK voting to leave EU and that he did not believe there would be a repeat of the boom that followed the country’s departure from the ERM.
The former speculator cited three reasons for his pessimism: the lack of scope for interest rates to be cut aggressively after Brexit; the risk of capital flight owing to the UK’s big current account deficit; and the squeeze on living standards caused by higher import prices.
Edwards said: “I would have thought a 20% sterling devaluation is exactly the antidote needed in the current circumstances. Yes of course a fall in sterling increases import prices and squeezes household real incomes, but the booming profits companies enjoy from a weaker sterling should generate a virtuous wage price spiral and take us away from the deflationary abyss that awaits all developed economies in the next recession.”
He added that Japan’s prime minister, Shinzo Abe,, had been trying to achieve the same result with his so-called Abenomics being designed to drive down the value of the yen. “Hence I would be much more positive about the immediate post-Brexit economic outlook than Mr Soros.”
Edwards said Société Générale were taking no view on the outcome of the vote and that he was simply discussing the possible implications of a Brexit vote.
He also expressed scepticism about the warnings issued by a number of leading economic institutions about the consequences of a vote to leave.
“The IMF, OECD, Bank of England and UK Treasury have all warned of the likelihood of UK recession in the event of Brexit. That is indeed possible but it must be said that all of these institutions have been extremely poor at forecasting even one year ahead, let alone forecasting recessions or a crisis. If they are right, and they might well be, it would be a first.”
This article was written by Larry Elliott, for theguardian.com on Wednesday 22nd June 2016 14.30 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010